|  Home   |  Site Search   |  Tax News & Views  |

Go to our Special Report on tax law changes.

Senate Sends President Health Insurance Reform, Small Business Tax Bills

Friday, August 2, 1996

Deloitte & Touche OnLine

The Senate Friday approved and sent to President Clinton for his signature the conference agreements on the small business tax incentive bill (HR 3448) in a 76 to 22 vote and on the health insurance reform bill (HR 3103) in a 98 to 0 vote. Both conference agreements already passed the House.

President Clinton is expected to sign both bills into law within the next few weeks.

Health insurance reform

The health insurance reform bill phases-in an increase to 80% of the self-employed health insurance deduction, establishes a medical savings account pilot program, clarifies the tax treatment of long-term health care, and creates an exclusion for accelerated death benefits under life insurance contracts.

To offset the anticipated revenue loss, the bill disallows the interest deduction for corporate-owned life insurance policy loans on interest paid or accrued after Oct. 13, 1995, and imposes rules that penalize individuals who give up their citizenship to avoid U.S. taxation.

Small business tax bill

The main thrust of the bill increases the expensing limitations for small businesses. Present law allows small businesses to expense about $17,500 annually. Under the legislation the amount would be increased to:

• $18,000 for 1997.
• $18,500 for 1998.
• $19,000 for 1999.
• $20,000 for 2000.
• $24,000 for 2001.
• $24,000 for 2002.
• $25,000 for 2003 and thereafter.

The bill would make several clarifications to the present law safe harbor for establishing independent contractor status, including shifting the burden of proof to the IRS in certain employment tax cases.

The bill also would include several modifications to the rules regarding S corporations. It would increase to 75, from 35, the number of shareholders an S corporation may have and permit S corporations to hold wholly-owned subsidiaries. Also the bill would treat financial institutions that do not use the reserve method as eligible corporations, and permit tax-exempt entities and employee stock ownership plans to be subchapter S shareholders.

Pension rules would be simplified and strengthened by establishing savings incentive match plans for small businesses, allowing Section 457 plans to establish trusts, allowing tax-exempt organization to establish 401(k) plans, establish safe-harbor non-discrimination rules for Section 401(k) plans, and provide several simplified rules for church plans.

Another retirement-related provision in the bill would permit deductible Individual Retirement Account contributions of up to $2,000 to be made for spouses, including homemakers who do not work at home.

Expiring provisions

The research and experimentation tax credit, and the orphan drug credit would be extended from July 1, 1996, through May 31, 1997.

The exclusion for employer-provided educational assistance would be extended from Dec. 31, 1994, through May 31, 1997. However, for periods after June 30, 1996, the exclusion would not apply to graduate-level education.

Revenue offsets

To offset the revenue loss from these changes, the bill phases in a repeal of the Puerto Rico and Possession tax credit. The bill would repeal Section 936 over a ten-year period for companies currently doing business in U.S. possessions. For other companies, the credit would be repealed for taxable years beginning after Dec. 31, 1995.

The bill would repeal the 50% interest income exclusion for financial institution loans to employee stock ownership plans and repeal Internal Revenue Code Section 956A relating to earnings invested in certain passive assets.

The bill also would treat certain subpart F insurance income by a controlled foreign corporation as unrelated business taxable income of a tax-exempt U.S. entity.

A new type of statutory entity called a financial asset securitization investment trust would be established to facilitate the securitization of debt obligations, such as credit card receivables, home equity loans, and auto loans.

The airport trust fund excise tax would be reinstated from one week after enactment until Dec. 31, 1996, and the information reporting and anti-abuse rules for foreign trusts would be strengthened.